Dollar appreciation v/s Indian Rupee - its impact on the

Indian Economy

Project submitted

H & G H Mansukhani Institute of Management in Partial

fulfilment of the requirement for

Master in Management Studies

By

DEEPA CHHANGANI

Roll No : 09

Specialization : Finance

Batch : 2018 – 2020

Under the guidance of

Dr. ANJU VASWANI

 H & G H Mansukhani Institute of Management

Ulhasnagar September 2020

Student’s Declaration

I hereby declare that this report is submitted in partial fulfillment of the requirement of
MMS Degree of University of Mumbai to H. & G. H. Mansukhani Institute of
Management. This is my original work and is not submitted for award of any degree or
diploma or for similar titles or prizes.

Name : Deepa Chhangani

Class : SYMMS

Roll No : 09

Place : Ulhasnagar

Date :

Students Signature :
 Certificate

This is to certify that the project submitted in partial fulfillment for the award of MMS
degree of University of Mumbai to H & G H Mansukhani Institute of Management is a
result of the bonafide research work carried out by
Ms. DEEPA CHHANGANI under my supervision and guidance, no part of this report
has been submitted for award of any other degree, diploma or other similar titles or
prizes. The work has also not been published in any journals/Magazines.

Date :

Place : Ulhasnagar

External Guide Director

(Signature & Name of the Guide) (Dr. Swati Sabale)

Faculty Guide

(Dr. Anju Vaswani)

 Table of Contents

Chapter No. Particulars Page No.

1 Executive Summary 1
2 Inroduction 3
3 Industry Overview 7
4 Company Overveiw 12
(A) Future Generali
(B) RBI as the ultimate FOREX controller
5 Project details: 25
• Objectives and Limitations of The Project
• Methodology
• Source/s of Data
• Data Collection Instrument
6 Data analysis and Interpretation 31
7 Recommendations/Findings 37
8 Key learnings 41
9 Conclusions 43
10 Bibliography 44
11 Annexure 45
 Chapter 1:

EXECUTIVE SUMMARY OF THE PROJECT

EXECUTIVE SUMMARY

This is an attempt to understand the functions and the relationship of an American

Dollar with respect to our Indian currency with the help of a practical hand in the above
mentioned fields. As a student of a PGDM program, it is a section of study, which each
student has to undergo a Summer Internship Project (SIP) at an esteemed organization.
Therefore, I got the opportunity of summer training at Future Generali India- Total
Insurance Solutions.
In the initial part of the project book, a general information has been collected. The data
for the same has been received from Primary as well as Secondary sources.
In the later part of the project, an in-depth study has been done on the specialized topic,
i.e. “Dollar appreciation v/s Indian Rupee- its impact on the Indian Economy”. The
main objective of this study is to understand the various effects and the inverse effects,
which an American Dollar possess as it rules the global market as well as the Indian
Economy.
The US dollar has created various circumstances for the Indian economy, which has
made our Indian Rupee to depreciate, which depicts that there is a strong and a
significant negative impact because of the currency rate volatility and this doesn’t just
limit to India, but also to many other inter-connected countries of the world and a
hundred of various sectors as well. There exist a complicated rather a complex
relationship between the currency rates and the import export of a country. The
following study has also taken into consideration how the currency volatility not only
affects India as a country but also the deep down after effects of the rate fluctuations
among the two countries – USA & India.
Indian economy has already suffered from various fiscal and current account deficits
adversely affected by the relatively exchange rate pressure. Then again, high growth
along with a market driven exchange rate bears well for the economy. However, when
growth becomes unsteady and macroeconomic parameters starts appearing weakened,
one of the first casualties is the exchange rate.
These problems are manifold. Persistent high inflation and fiscal deficit, increasing
subsidies, unsteady exports and slowing industrial production point towards an
economy, which is moderating in growth. Monetary policy has so far been ineffective
in reversing the inflation trajectory.
Currently, there is no clarity on whether we have seen the worst of the storm or it is just
the beginning. To track it again on the way many hard decisions were taken by Indian

1
govt. This paper presents different challenges due to these fluctuation and steps
triggered by the central bank and government to create stability.

2
 Chapter 2: INTRODUCTION OF THE PROJECT

1. INTRODUCTION:

When dollar rate decreases it means that value of rupee increases and vice-versa. Dollar
rate is affected by the supply and demand of both the currencies involved. If demand
of dollar is more than dollar rate will increase because people are willing to sacrifice
more of rupees to obtain 1 dollar. If demand of rupees is higher than dollar rate will
decrease because not many will be trading rupees for dollars, hence, to make dollar
more lucrative/ attractive, its value will be reduces, giving us lower dollar rate.
Dollar rate affects people in India because all the exports and imports are done in dollar
currency. If dollar rate is higher than traders of India will have to let go of more rupees
to pay for goods. When a trader obtains the goods at higher price then they will certainly
sell it also at higher price. Eventually, goods become costly for Indian consumers
because of high dollar rate. Apart from trading, other factors may also get influenced
like FDIs, profits, interest rates, etc.
The Effects of Changes in Foreign Exchange Rates outlines how to account for foreign
currency transactions and operations in financial statements, and also how to translate
financial statements into a presentation currency. An entity is required to determine a
functional currency (It is also known as domestic currency where the entity operates)
based on the primary economic environment in which it operates and generally records
foreign currency transactions using the spot conversion rate to that functional currency
on the date of the transaction.
Currency fluctuations are a natural outcome of the floating exchange rate system that
is the norm for most major economies. The exchange rate of one currency versus the
other is influenced by numerous fundamental and technical factors. These include
relative supply and demand of the two currencies, economic performance, outlook
for inflation, interest rate differentials, capital flows, technical support and resistance
levels, and so on. As these factors are generally in a state of perpetual flux, currency
values fluctuate from one moment to the next. So the dollar rate fluctuation will impact
the PPP. If it is higher than India, then one can’t afford commodities and it is a burden
on your

personal income because you will spend more money on it if it is a basic need. For
example Oil.
All eyes are on the rupee which has fallen in value against the US dollar. It has racked
up macroeconomic issues concerning the slow economic growth, corporate earnings
and market volatility. It is the common man who is going to hit the most. The falling
rupee and the rising dollar can be translated into more expensive foreign holidays,
educations or products.

3
The dollar price rise can be attributed to the deficit in the trade. It means that Indian
imports exceed its import. The outflow of dollars can also be attributed to selling of
Indian stocks by foreign investors. The resulting outflow of dollar has increased its
price against the Indian rupee. The rupee has weakened against the dollar which means
you spend more rupees to get that dollar. Large Indian imports like crude oil, fertilizers,
medicines and iron ore have become costlier. The rising petrol and diesel prices have
affected transportation charges. So, as a consumer get prepared for higher grocery bills.
The Fast Moving Consumer Goods like soaps and shampoos require imported raw
material. The cost pressure on companies will lead them to revise the prices of their
products. The prices of pulses and oil which are largely imported are going to see a rise
in prices. “Crude palm oil prices set the pace for prices of other edible oils. It is imported
in large quantities and any rise in its prices will add to the inflationary pressure,” warns
Arvind Chari, fund manager, fixed income, Quantum Asset Management.
Students heading abroad should get prepared to shell out more for their education and
living expenses. Students taking loans for their overseas education too will be affected.
They get their loan in Indian rupees but have to pay in foreign currency. “They may
also fall short in funds as the loan would have been taken according to their initial
requirements. In such a scenario, either the student’s personal contribution will have to
be increase or he will have to ask the bank to increase the loan amount.
This, however, does not apply for jobs that are paid in dollars. Vacationers are going to
feel the heat of the rising dollar. The airfares, stay, shopping and food will be more
expensive. However, those who got their holiday packages before the depreciation of
the rupee are safe for the moment. A little fore thought may help travelers like selecting
short

haul destinations or heading for a non-dollar country. The hotel industry especially the
luxury section will benefit. They get their revenue in foreign currency.
Car companies are already revising their prices as they are dependent on imported raw
material, pay royalties to their parent firms and have loans and borrowings in foreign
currency. Consumers of imported paperbacks and gizmos should gear up to pay more.
Marketing companies will try and absorb the increase in cost but there may be cases
when the consumer may have to bear the brunt.
International food chains spend on imported kitchen equipment and some amount of
raw material. Eating in these outlets will see a significant rise in expenditure. If
you are a Non Resident Indian this is the time to either invest in India or repatriate
money home. The Reserve Bank of India has also made things attractive by
deregulating interest rates on NRI deposits. NRIs can invest in Indian bank deposits
and expect a return of 7% post tax. For a NRI paying EMIs for a home loan in India,
this is the time of triumph. The NRI will pay fewer amounts in dollars as part of the
EMIs. However, NRIs who decide to repatriate their rupee investments in the country
they live in, will find they have lost out. NRIs should remain invested in India while
the rupee remains weak.

4
If the dollar rate increases, eventually it will devaluate the value of Indian currency.
And ultimately exports will reduces due to low rate of Indian currency regarding to
dollar in international market. And it will directly affect the revenue. If the dollar rate
decreases, it increases the value of Indian currency. And then the exports exceeds
imports and will increase the revenue which will affect GDP. And it is so much
important to us because it will eventually affect us if the Indian currency devaluate.

What establishes a relationship between the US dollar and the Indian rupee?

We are all familiar with the concept of exchange rates and how they are used to
exchange currencies of different countries. But how exactly are the currency rates
determined? On what basis does the market decide whether the value of the dollar will
be Rs.70/$.

The exchange rates are tradable commodity it is mostly determined by the Demand and
the Supply forces of the market. The health of the economy is an underlying asset for
the currency, as it is not like any other commodity. According to many researches, a
strong currency normally co-exists with a strong economy and vice versa.

Does all this mean that Indian Rupee is a weak currency and its future is bleak? Or are
we cherry-picking the data?
• Indian Rupee has performed well against other major currencies which include
currencies of other Emerging Market Economies. Hence, it’s the US Dollar that has
gained against the majority of currencies. Rather than Indian Rupee having lost to US
Dollar or weakened.
• Currency fluctuations are a natural outcome of the floating exchange rate system
that is the norm for most major economies.
• The exchange rate between two currencies is that rate at which one currency
will be exchanged with another currency.
• It is also known as a foreign-exchange rate, forex rate. Exchange rate of one
currency versus the other is influenced by numerous fundamental and technical factors.
• These include relative supply and demand of the two currencies, economic
performance, outlook for inflation, interest rate differentials, capital flows, technical
support and resistance levels, and so on.
• As these factors are generally in a state of perpetual flux, currency values
fluctuate from one moment to the next. But although a currency’s level is largely

5
supposed to be determined by the underlying economy, the tables are often turned, as
huge movements in a currency can dictate the economy’s fortunes.

6
 Chapter 3: INDUSTRY OVERVIEW:
Foreign Exchange Market in India

2. INDUSTRY OVERVIEW:

THE FOREIGN EXCHANGE MARKET OF INDIA

The market in which international currency trade takes place i.e. where foreign
currencies are bought and sold simultaneously is called the Foreign Exchange (Forex)
Market. It is the organizational framework within which banks, merchants, firms,
investors, individuals and government exchange foreign currencies for one another.
Foreign exchange typically refers to the exchange rate or the foreign exchange market.
The foreign exchange is the global market for currency trading. The foreign exchange
market determines the value of all different currencies. International investments and
trade are handled by the foreign exchange by converting currency from one currency to
another. A business or individual can purchase one currency using another currency.
This process allows transactions to be completed in a different currencies. The foreign
exchange market is unique. Factors that make the foreign exchange market unique are
its continuous operation, large trading volume, and geographical dispersion. In
addition, this market uses leverage to enhance profit margins. The foreign exchange is
a floating exchange rate rather than a fixed exchange regime. Due to this fact, there are
many influences which cause exchange rate fluctuations. Overall, exchange rates are
affected by a variety of factors. Factors which can and do affect foreign exchange rates
are political conditions, economic factors and market psychology. Economic factors
which may affect the foreign exchange rate are inflation levels and trends, a balance of
the trade levels and trends, government budgets and government fiscal policy. Political
conditions, such as destabilization of a government and political upheaval can
negatively impact a country’s economy and therefore also have an effect on the foreign
exchange.
In India the currency in circulation is called the rupee INR and in the United States, the
currency in circulation is called the US Dollar (USD).An example of a Forex trade is
to sell the Indian rupee while simultaneously buying the US Dollar. Forex market has
no geographical location, it is electronically linked network and is open 24 hours a day.
The value for which one currency is exchanged for another or the value of one currency
in terms of another currency is called exchange rate. For example, US dollar can be
bought for 63

INR rupees. This is the exchange rate for Indian rupees in US dollars. The foreign
exchange market in India started when in 1978 the government allowed banks to trade
foreign exchange with one another. Foreign Exchange Market in India operates under

7
the Central Government of India and executes wide powers to control transactions in
foreign exchange. The Foreign Exchange Management Act, 1999 or FEMA regulates
the whole Foreign Exchange Market in India. Before the introduction of this act, the
foreign exchange market in India was regulated by the Reserve Bank of India through
the Exchange Control Department, by the Foreign Exchange Regulation
Act or FERA, 1947. Interbank foreign exchange Trading is regulated by the Foreign
Exchange Dealers Association of India (FEDAI) created in 1958, a self-regulatory
voluntary association of dealers or banks specializing in the foreign exchange activities
in India that regulates the governing rules and determines the commissions and charges
associated with the interbank foreign exchange business. Since 2001, clearing and
settlement functions in the foreign exchange market are largely carried out by the
Clearing Corporation of India Limited (CCIL) that handles transactions of
approximately 3.5 billion US dollars a day, about 80% of the total transactions.
The foreign exchange market in India consists of 3 segments or tires. The first consists
of transactions between the RBI and the authorized dealers (AD). The latter are mostly
commercial banks. The second segment is the interbank market in which the AD’s deal
with each other. And the third segment consists of transactions between AD’s and their
corporate customers. As in any market essentially the demand and supply for a
particular currency at any specific point in time determines its price (exchange rate) at
that point. Prior to 1990s fixed Exchange rate of the rupee was officially determined by
RBI. During the early years of liberalization, the Rangarajan committee recommended
that India’s exchange rate be flexible. India moved from a fixed exchange rate regime
to “market determined” exchange rate system in 1993. This is explained as under. A
country’s currency exchange rate is typically affected by the supply and demand for the
country’s currency in the international foreign exchange market. Let’s take the example
of Rupee Dollar exchange. The rupee/dollar rate is a two-way rate which means that
the price of 1 dollar is quoted in terms of how much rupees it takes to buy one dollar.
The value of one

currency against another is based on the demand of the currency. If the demand for
dollar increases, the value of dollar would appreciate. As the quotation for Rs/$ is a two
way quote, an appreciation in the value of dollar would automatically mean the
depreciation in Indian rupee and vice-versa.
FOREIGN DIRECT INVESTMENT:

Foreign Direct Investment would be a direct investment by any corporation in a

commercial venture in another country. It is an investment made by a company or
individual in one country in business interests in another country, in the form of either
establishing business operations or acquiring businesses assets in other countries, such
as ownership or controlling interest in a foreign company.
Broadly, foreign direct investment includes “mergers and acquisitions, building new
facilities, reinvesting profits earned from overseas operations and intra company loans”.

8
FOREIGN DIRECT INVESTMENT IN INDIA:

Insurance in India is a growing and flourishing industry with both international and
national players competing and growing at rapid rate together with Banking and Real
Estate, it constitutes 12.9% of Gross Domestic Product (GDP) in India.
Insurance sector was liberalized in 2001. Even after the liberalization of the insurance
sector, the public sector insurance companies have continued to dominate the insurance
market. They were enjoying 90% of market share. FDI in Insurance sector would
increase the penetration of insurance in India. FDI can meet India’s long term capital
requirements of fund the buildings and infrastructures.
Aside from being a basic driver of monetary development, foreign direct investment
(FDI) is a noteworthy wellspring of non-obligation budgetary asset for the financial
advancement of India. Remote organizations put resources into India to exploit
generally bring down wages, extraordinary speculation benefits, for example, charge
exclusions, and so on.

The government administration has taken numerous activities as of late, for example,
unwinding FDI standards crosswise over parts, for example, protection, PSU oil
refineries, telecom, control trades, and stock trades, among others. According to
Department of Industrial Policy and Promotion (DIPP), the total FDI investments India
received during April – September 2016 rose 30 per cent year-on-year to US$ 21.6
billion, indicating that government’s effort to improve ease of doing business and
relaxation in FDI norms is yielding results.
During April – September 2016, India received the maximum FDI equity inflows from
Mauritius (US$ 5.85 billion), followed by Singapore (US$ 4.68 billion), Japan (US$
2.79 billion), (US$ 1.62 billion), and USA (US$ 1.44 billion). Impact investments in
India is expected to grow at a compound annual growth rate (CAGR) of 20-24 per cent
to touch US$ 6-8 billion by 2025, from US$ 1 billion in 2015.
INCREASE IN FDI:

The Cabinet of Narendra Modi has approved the hike of the Foreign Direct Investment
in the insurance sector from 26% to 49%. The Parliament has passed Insurance Laws
(Amendment) Bill, 2015. It was first passed in Lok Sabha on 4th March 2015 and later
in Rajya Sabha on 12th March 2015 which becomes an Act as soon as the President
signs it.
The Amendment bill aims to bring improvement and revisions in the existing law
relating to insurance business in India. Insurance Regulatory and Development
Authority (IRDA) is in favor of an increase in foreign equity capital in insurance joint
ventures. The public sector insurance companies have been continuing to dominate the
insurance market of the country.

9
The stock market has reacted positively to the news and the shares of Reliance Capital
and Max India gained more than 4.5% in intra-day trade today. The higher FDI cap will
immensely help the insurance sector which is extremely short on investments.

BENEFITS OF INCREASE IN FDI:

Listed below are some advantages from the increase of foreign direct investment in
insurance sector in India from 26% to 49%.
1. Increased Insurance Penetration With the number of population in more than
100 crores, India requires Insurance more than some other country. Be that as it may,
the insurance penetration in the nation is just around 3 percent of our Gross Domestic
Product as for general premiums endorsed every year. This is far less when contrasted
with Japan which has an insurance penetration of more than 10 percent. Expanded FDI
cutoff will fortify the current organizations and will likewise permit the new players to
come in, thereby empowering more individuals to purchase life cover.
2. Level Playing Field: With the expansion in foreign direct investment to 49
percent, the insurance agencies will get the level playing field. So far the state claimed
Life Corporation of India controls around 70 percent of the life insurance market.
3. Increased Capital Inflow: Most of the private sector insurance companies have
been making considerable losses. The increased FDI limit has brought some much
needed relief to these firms as the inflow of more than 10,000 crore is expected in the
near term. This could go up to 40,000 crore in the medium to long term, depending on
how things pan out.
4. Job Creation: With more cash coming in, the insurance agencies will have the
capacity to make more employments to meet their objectives of wandering into under
guaranteed advertises through enhanced framework, better operations and more
manpower.
5. Favorable to the Pension Sector: If the pension bill is passed in the parliament
then the foreign direct investment in the pension funds will also be raised to 49 percent.
This is because the Pension Fund Regulatory Development Bill links the FDI limit in
the pension sector to the insurance sector.
6. Consumer Friendly: The end recipient of this change will be basic men. With
more players in this part, there will undoubtedly be rivalry prompting to aggressive
quotes, enhanced administrations and better claim settlement proportion.

7. Benefit to the common man & actuaries being: More options from the foreign
company (if the same was not already available with Indian). Also now since the capital
is more than earlier, the Insurance Company can diversify their sectors of Insurance
(like Motor, Mortgage, Health etc.). Take more risks than earlier since there is more

10
money & more support. More competition leads to better offers, so better benefits for
common man.
8. Effect on Economy: More Foreign capital flows into the Indian Economy. Also
this more investment will lead to demand for Indian Rupee in International Money
Market (Because one has to invest in Rupee in India), there by decrease in Rupee to
Dollar rate of exchange. This to a common man will reduce the cost of Imported goods
(since the exchange rate is low 1$=40Rs??). Also the Forex reserves will be maintained.
As well the market speculation will also play an important role, leading to Sensex hike
& better confidence in Business makers in India. More business will lead to need risk
protection & Insurance.

11
 Chapter 4: COMPANY OVERVIEW
A) FUTURE GENERALI INDIA- TOTAL INSURANCE SOLUTIONS.

Future Generali Life Insurance is a joint venture between Future Group - a leading
retailer of India, Generali Group - a global insurance group and one of the world’s 50
largest companies and Industrial Investment Trust Ltd (IITL), a leading NBFC. It
provides a complete range of life insurance solutions to customers and enterprises.
The Company was incorporated in September 2007 with the objective of catering to an
under-insured country and provide financial security to people. The company offers a
Comprehensive range of products across savings, protection, and unit linked policies,
retirement plans as well as group products.
The company reaches out to customers through more than 20,000 advisors and FG
Direct channels across the country. In a span of 7 years, the Company has 98 branches
across the country. The company has sourced over 11 lakh policies, and today insures
over 450 marquee corporates in India and internationally such as Cadbury, Coca-Cola,
Intel, Philips, DuPont, Reebok, Jet Airways, Morgan Stanley to name a few.
The company aims to be an insurer of choice and has taken several steps to reach out
to its customers through various touch points and to enhance customer experience.
Initiated new lines of business through online products and credit life; and has launched
two new lines of distribution – Insurance Marketing Firms and Corporate to Retail.
Forayed into its first bancassurance partnership with Saraswat Bank and Bajaj Finserv.
It has also tied-up with India Nivesh and Andromeda. For the credit life business, the
company has entered into a partnership with GIC Housing Finance and Religare; and
for Retail Assurance with Big Bazaar.

Milestones for Future Generali India Life Insurance: Leading Indian Insurance
Company
2013 Buys 22.5 per cent stake from Future Group

2006 Gets incorporated as a joint venture (JV)

12
 Table No.1: Data about the company.

ABOUT GENERALI:

The Generali Group is one of the largest global insurance providers with 2013 total
premium income of €66 billion. With 77,000 employees worldwide serving 65 million
clients in more than 60 countries, the Group occupies a leadership position on West
European markets and an increasingly important place on markets in Central Eastern
Europe and Asia. ABOUT FUTURE GROUP Future Group operates some of India’s
most popular retail chains including Central, Big Bazaar, Food Bazaar, Home Town
and eZone.
The group’s retail formats connect over 300 million customers to over 30,000 small,
medium and large enterprises that supply products and services to its retail chains.

Registered Office: Future Generali Life Insurance Company Limited. Indiabulls

Finance Centre, Tower 3, 6th Floor, Senapati Bapat Marg, Elphinstone (W), Mumbai
- 400 013

13
ACHIEVMENTS SO FAR TILL 2019

• Located in 117 cities with presence in major cities across India.

• Over 13.8 lakh policies have been sourced since inception to secure peoples'
future.

• 95.15% claims have been settled. The claim settlement ratio for financial year
2018-19.
Types of Future Generali Life Insurance (PRODUCTS)

One of the strong points of Future Generali Life Insurance Company is the many plans
it offers clients. The company has been introducing new plans often. The old ones still
exist. The bottom line is that the wings of Future Generali Life Insurance Company
keep spreading hence offering ample coverage to all. Among the plans that you might
be interested in include
1. Future Generali Investment Plan

2. Future Generali Ulip Plan

3. Future Generali Term Insurance

4. Future Generali Pension Plan

5. Future Generali Child Plan

14
Table No.: 2 All about Future Generali

15
B) RESERVE BANK OF INDIA- THE ULTIMATE FOREIGN EXCHANGE
CONTROLLER
RBI has reduced the Repo rate again by 25 points on June 6, 2019. Now the Repo rate
is 5.75%. Reserve Bank of India (RBI) as Central Bank of the country is the monetary
authority and the major Role of RBI is of a controller of credit.
Recent changes in RBI monetary policy announced for 2019, change in RBI leadership
and changes in the rates of its various credit control tools, have again brought RBI in
the lime light of discussion at various economic and business forums especially at the
top B-schools where a slight change in RBI Monetary policy becomes a point of
analysis as it impacts the economy of the country.
Reserve Bank of India plays multi-facet role by executing multiple functions such as
overseeing monetary policy, issuing currency, managing foreign exchange, working as

16
a bank of government, this article shares the key aspects related to RBI role, changes in
the Bank Rate, CRR, Repo Rate, SLR and other key functions performed by the RBI.
Regulator of Foreign Exchange:

It is the function of the RBI to maintain the value of the rupee in the global economy.
It does so by acting as the custodian of foreign exchange reserves in the country. It
maintains enough reserves to battle against fluctuations.
If you remember from the recent demonetization event, the RBI played a major role in
that. This is because the RBI is responsible for the monetization of the economy, i.e.
the currency policy. The entire economy depends on the availability of money in the
market. So the money supply is also critical to the functioning and success of
businesses. And businesses also require foreign currency for international trade.
The RBI is also responsible for the foreign exchange mechanism of the economy. So
the RBI plays a very direct role in the government’s facilitation of business in the
economy.

Functions of RBI under the FEMA act:

Foreign Exchange Management Act (“FEMA”) envisages that Reserve Bank of India
(“RBI”) will have a key role in management of foreign exchange. The main functions
of RBI under FEMA are as follows:
a) Controlling dealings in foreign exchange by giving general or special
permission for dealing in foreign exchange, excluding those cases where specific
provisions have been made in Act, Rules or Regulations – Section 3.
b) RBI cannot impose any restrictions on current account transactions. These can
be imposed only by Central Government in consultation with RBI – Section 5.
However, in certain cases, prior approval of RBI is required for current account
transactions as provided in Foreign Exchange Management (Current Account
Transactions) Rules, 2000.
c) Specifying conditions for payment in respect of capital account transaction –
Section 6(2).
d) Regulate/prohibit/restrict the following, by issuing Regulations:

• Transfer or issue of foreign security to resident and Indian security to non-

resident.
• Borrowing and lending in foreign exchange or to a foreign person;

17
• Export/import of currency or currency notes;

• Transfer of immovable property outside India;

• Giving guarantee or surety where foreign exchange transaction is involved-

Section 6(3)
e) Specify (by regulation) period and manner in which foreign exchange due from
export of goods and services should be received – Section 8.
f) To grant exemption from realization and repatriation in cases specified under
Section 9.

g) Granting authorization to ‘Authorized Person’ to deal in foreign exchange, to

give directions to them and to inspect the authorized person – Sections 10, 11 & 12.

How does RBI manage and control foreign exchange?

The RBI acts as the custodian of the country’s foreign exchange reserves, manages
exchange control and acts as the agent of the government in respect of India’s
membership of the IMF.
Exchange control was first imposed in India in September 1939 at the outbreak of
World War II and has been continued since. Under it, control was imposed on both the
receipts and payments of foreign exchange.
The foreign exchange regulations under the law required that all foreign exchange
receipts whether on account of export earnings, investment earnings, or capital receipts,
whether oh private account or on government account, must be sold to the RBI either
directly or through authorized dealers (mostly major commercial banks). This resulted
in centralization of country’s foreign exchange reserves with the RBI and facilitated
planned utilization of these reserves, because all payments in foreign exchange were
also controlled by the authorities.
The exchange control was so operated as to restrict the demand for foreign exchange
within the limits of the available supplies of it. Foreign exchange was rationed among
competing demands for it according to the government policy. All this became essential
in the context of actual or potential shortage of foreign exchange, which had been an
important constraint on India’s efforts at planned economic development, most of the
time.
Faced with acute foreign exchange crisis, the new government at the Centre (constituted
in June 1991), took several successive steps to meet the problem:

18
(i) The Rupee was devalued by 18% against the US Dollar and other hard
currencies in two steps in quick succession in early July 1991 to correct substantially
the over valuation of the Rupee and thereby to make Indian exports more competitive
in world markets and to make imports into India costlier than before.
(ii) The new trade policy of July 1991 introduced a system of EXIM scrip, under
which exporters earned freely tradable import entitlements equal to 30 per cent (or 40
per cent in

some cases) of the value of their exports. The scrip commanded premium when sold.
This system was soon discarded in favor of a system of partial (60:40) convertibility of
the Indian Rupee into foreign exchange.
(iii) Finally, in the budget for 1993-94, the Rupee was made fully convertible on
trade account. That is, the system of a single unified exchange rate of the Rupee was
introduced in place of the previous dual rates system. This single rate is determined
entirely by the forces of demand and supply and not officially. This, of course, does not
mean that one can go to a bank and buy any amount of foreign exchange one likes
against rupees.
The entire gamut of foreign exchange restrictions remain, placing a strict limit on the
overall demand for foreign exchange. The RBI continues to act as the ultimate guardian
of the foreign exchange value of the rupee and as such intervene, that is, buy and sell
rupees in the foreign exchange market at its discretion.
Even now, it is only the authorized dealers in foreign exchange (mostly banks) who can
buy and sell foreign exchange and maintain only a minimum “position” that is
unmatched by buy and sell orders. Thus, large speculators in foreign exchange have not
been allowed in the market;
(iv) Receipts and payments on capital account continue to be subject to controls;
and

(v) All transactions are conducted within the framework of exchange control
regulations which are being liberalized progressively.
ROLE OF RBI IN FOREX MARKET:

Post-Independence, India’s exchange rate was fixed by the RBI against pound sterling,
under the fixed or pegged exchange rate mechanism. Subsequently the exchange rate
under the fixed exchange rate mechanism was changed to dollars and then to a basket
of currencies.
The first step at reforms in exchange rate management was taken in 1993, and then
referred to as ‘Liberalized Exchange Rate Management System’ or LERMS. Under this
the dollar was used as intervention currency, which implied that primary exchange rate,

19
all official government statistics would be dominated in U.S. dollar in terms of global
trends

and convenience. Under LERMS there was a ‘dual exchange rate’, one officially
decided by the RBI and the other through market forces. All foreign exchange
transactions up to 40% was to be at the official rate and the remaining at the market
rate.
However, after 1999 the official rate was discontinued and exchange rate became
market-determined exchange rate (MDER). Under MDER the forces of demand and
supply of dollars in India determine the exchange rate. The demand for dollars is
downward sloping (lower demand when more rupees have to be offered and higher
demand when lesser rupees have to be offered). Similarly the supply of dollars is
upward sloping (less is sold when lesser rupees are offered and more is sold when more
rupees are offered). Thus this interaction of demand and supply determines the
exchange rate, at which the demand and supply of dollars balance out.
Any surge in the inflow of dollars leads to the rupee gaining value (appreciation). This
renders imports cheaper and exports expensive. To prevent impact on exports under
MDER, the RBI purchases dollars by creating an artificial demand for the excess dollars
in circulation. Any act of purchase of dollars by the RBI impacts liquidity as rupees get
released into the system creating inflationary pressures. In such circumstances the RBI
simultaneously goes for the reverse repo auction to soak up the excess liquidity created
on account of purchase of dollars by the RBI. The reverse repo auction is done under
the Market Stabilization Scheme (MSS).
Any act of interference by a Central Bank i.e., the RBI in influencing the exchange rate
is called as ‘dirty floats’. But in India it is referred to as ‘managed floats’. In adverse
circumstances of demand for dollars going up more than the supply of dollars, it results
in rupee losing value (depreciation). Though it can positively impact exports and
discourage imports, it is usually seen as an erosion of faith in the home currency and
can escalate into a currency crisis.
In such circumstances the government has to sell foreign currency to augment the
supply of dollars. However, the experience has been that more the currency is sold,
more is the depreciation. Thus RBI instead of targeting any exchange rate, intervenes
in the foreign exchange market only to manage the volatility and disruptions to the
macro economic situation.

How does the Reserve Bank of India control foreign exchange rate and maintain
volatility of rupee?
RBI monitors the demand and supply situation of the dollar and based on it revises the
exchange rate for the moment. If there is a slide, RBI keep releasing dollars to buy
rupee being sold which is nothing but acting as a specialist or taking position as a buyer
of rupee. Once there is enough buyers for the seller, RBIs intervention thus create a
situation of matching every seller with a buyer and this prevents mismatch and slide.

20
In other words,

• RBI stabilizes the volatility through Managed Floating Rate System, a system
in which the Foreign exchange rate is determined by market forces and central bank,
RBI influences the exchange rate through intervention in the forex market.
• In this system the RBI intervenes in the foreign exchange market to restrict the
fluctuations in the exchange rate up to a certain limit. It aims to keep exchange rate
closed to the desired value.
• And when RBI realizes that the market value of domestic currency is heavily
depreciating (against dollar), it restore its value by selling US dollars in the international
market, the bank expects to increase the supply of dollar to reduce the price of dollar in
relation to the domestic currency.
• On the other hand when RBI realizes that the market value of the domestic
currency is rising (causing a fall in foreign demand for domestic goods), it may start
buying the foreign currency.
Therefore,

The central bank manages to reach different goals of the Foreign Exchange
Management Act, 1999. Their objective is to facilitate external trade and payment and
promote orderly development and maintenance of foreign exchange market in India.
With increasing integration of the Indian economy with the global economy arising
from greater trade and capital flows, the foreign exchange market has evolved as a key
segment

of the Indian financial market and the RBI has an important role to play in regulating
and managing this segment. The RBI manages forex and gold reserves of the nation.
On a given day, the foreign exchange rate reflects the demand for and supply of foreign
exchange arising from trade and capital transactions. The RBI's Financial Markets
Department (FMD) participates in the foreign exchange market by undertaking
sales/purchases of foreign currency to ease volatility in periods of excess demand
for/supply of foreign currency.
India's Foreign Exchange Reserves was measured at 394.1 USD billion in May 2019,
compared with 391.0 USD billion in the previous month. The data reached an all-time
high of 399.4 USD billion in Mar 2018 and a record low of 1.1 USD billion in Jun 1991
In the latest reports, India's Foreign Exchange Reserves equaled 8.7 Months of Import
in May 2019

21
Graph No.1: The amount of Foreign exchange, the RBI held in the span of 10 years

Graph No.2: The amount of Foreign exchange, the RBI held till July 23rd, 2019

22
How does RBI function with Insurance companies?

• Reserve Bank has notified 49 per cent foreign direct investment (FDI) under
automatic route in insurance sector.

• “The extant FDI policy for insurance sector has since been reviewed by the
Government of India and accordingly it has been decided to enhance the limit of foreign
investment in insurance sector from 26 to 49 percent under the automatic route subject
to certain terms and conditions which have been notified on March 30,” RBI said in a
notification today.

• “No Indian Insurance company shall allow the aggregate holdings by way of
total foreign investment in its equity shares by foreign investors, including portfolio
investors, to exceed forty-nine percent of the paid up equity capital of such Indian
Insurance company,” it said.

• “The foreign investment up to 49 percent of the total paid-up equity of the

Indian Insurance Company shall be allowed on the automatic route subject to approval
or verification by the Insurance Regulatory and Development Authority of India,” it
said.

• The foreign equity investment cap of 49 per cent will apply on the same terms
as above to Insurance Brokers, Third Party Administrators, Surveyors and Loss
Assessors and Other Insurance Intermediaries appointed under the provisions of the
Insurance Regulatory and Development Authority Act, 1999.

• Earlier, only up to 26 per cent FDI was permitted through the automatic
approval route. For FDI up to 49 per cent, the approval of the Foreign Investment
Promotion Board was required.

23
• There are 52 insurance companies operating in India, of which 24 are life
insurance business and 28 in general insurance.

Foreign Investment in Insurance industry:

• The economy of India has been boosted to a considerable level owing the
foreign investment inflow. The Government has been focused its efforts towards
reinforcement of commercial structure of the country by introduction of numerous
schemes for business development including incentives, easier procedural
requirements, limited compliance hurdles, etc., thereby encouraging foreign
investment.

• Foreign Direct Investment (hereinafter referred to as "FDI") serves as a source

to the resources requirements of the host country playing a significant role in enhancing
its production level. The multiple benefits offered by FDI are access to capital,
internationally available technologies, management know-how, marketing skills, etc.
• With a view to stimulate foreign investment in insurance sector in the form of
raising capital for business of the company, insurance brokers, third party
administrators, surveyors and loss assessors and other insurance intermediaries, the
Government raised the FDI limit to 49 % 1 and the same has also been covered under
Section 7A(b) of the Insurance Act. This measure was aimed at expansion of the capital
sensitive insurance industry increasing the stake of the foreign investors and opening
the door for more business operations in this arena.

24
 Chapter 5:

PROJECT DETAILS EXPLAINED

5. “DOLLAR APPRECIATION V/S INDIAN RUPEE”- ITS IMPACTS ON THE

INDIAN ECONOMY.
Objectives:

The motive of this research is to understand the various cause and effects a Dollar has
on our Indian Economy. And understand the true implications the appreciating value of
the Dollar with an adverse effect to the Indian Rupee, also to take into consideration,
what all stringent measures did the Indian Government take when the value of the
Rupee depreciated.
A part of this research also focuses on the demand supply of the currency rates across
the Global market. The main observation is to know, why and how are these forces
ruling the world market in both direct and inverse ways.
The objectives can be simplifies to the following versions as well:

• To analyze the current trends and patterns of the movement Indian Rupee versus
the dollar in the forex market.
• To analyze what are the long term as well as short term reasons behind recent
fall in Rupee-dollar exchange rate.
• To study the implications of rupee downfall on Indian Economy.

• To suggest the measures to combat the current account deficit.

Methodology of the Study:

The kind of research conducted here is descriptive research. There are various reports
on the above mentioned topic, therefore this research paper is an update to the earlier
researches conducted. Many economist have their own thesis for the fluctuations
currency rates and all their important aspects have been taken into consideration.

25
Information has been collected from various primary and secondary sources. From the
common tax-payers to the news articles of government officials have been focused on
for the collection of the information.
Data and statistics published by the Reserve Bank of India, CRISIL reports, IMF, etc.
have been accessed to justify the aforementioned objectives. Data has been also
collected with the help of various Research papers and magazines and newspaper
articles.
Sources of Data:

1. Government of India (2019), Central Statistics Office (CSO) website

(http://mospi.nic.in/Mospi_New/site/home.aspxx)

2. Reserve Bank of India statistics- http://www.rbi.org.in/scripts/statistics.aspx

3. Investopedia: https://www.investopedia.com/articles/forex/05/062205.asp

4. Investopedia- Foreign Exchange Dealers Association of India:

https://www.investopedia.com/terms/f/fedai.asp

5. Investopedia- The top indicators for India’s Economy:

https://www.investopedia.com/articles/investing/121714/top-indicators-indias-
economy.asp

6. PoundSterling:
https://www.poundsterlinglive.com/bank-of-england- spot/historical-spot-exchange-
rates/usd/USD-to-INR

7. XE Corporation:
https://www.xe.com/currencycharts/?from=USD&to=INR&view=10Y

26
Data Collection Instrument:

Surveys were conducted among the working class of people (most of whom, who pay
taxes and are actually aware of the current political situations of US and India.

Various Controversial questions were asked to get a view from the respondents as per
the knowledge about the topic.

Q1. What do you think determines the appreciation of US Dollars ?

Q2. Do you think the increase in the price of the crude oil has affected India's Rupee to
depreciate highly?

27
Q3. Do you think U.S President, Donald Trump is the sole reason behind the high rates
of Dollar?

Q4. Do you think India's neighboring countries play any major role in Rupee's
depreciation as compared to the universally accepted currency- Dollar?

Q5. How according to you, does the Indian rupee face attrition from the US economy?

28
Q6. Recent trade wars between USA and China has indirectly affected India resulting
in to a downfall of Rupee rates in the US market of Currency. True or False?

Q7. Do you think India's Prime Minister Narendra Modi and U.S President Donald
Trump's deteriorating relationship can cause a huge leap for the exchange rates in
future?

Q8. Do you think the Indian Government's inefficiency with respect to the nation's
development is the root of this imbalance in the Forex rate?

29
Q9. "Indian Economy is growing ever since there has been a change in the
Government." Do you think the previous Government would have performed better
than the current one?

Q10. "The Rich get richer and the Poor get poorer."- is what the Dollar appreciation &
Rupee depreciation resulting to?

30
 Chapter 6:

DATA ANALYSIS & INTERPRETATION

Based on the questions, I received a number of 60 responses. Since each question has
been raised as per the current political environment running in India, the answers
received are more or less similar.
After the responses were collected the SPSS tool was made to use to understand and
identify that whether the fluctuations in the forex currencies have a strong association
to the environmental factors of the economy. And with those impacts on the economy
does the demand supply of India has an adverse effect on the Indian Economy.
The tool used in SPSS is CHI SQUARE.

In the above case, the dependent variable is the INDIAN ECONOMY and the
Independent variables are the currencies, i.e. US Dollar and Indian Rupee.
Now, let us take a null hypothesis that the fluctuations in the value of the US Dollar
and Indian Rupee, does not have any impact or does not have any association with the
Indian Economy.

Chi-Square Tests
Asymptotic
Value df Significance (2-
sided)
Pearson Chi-Square 65.337a 12 .039
Likelihood Ratio 64.813 12 .000
Linear-by-Linear
27.421 1 .000
Association
N of Valid Cases 60

In the final output table, if the CHI-SQUARE value is less than or equal to 0.05, then it
means there is an association between the currency fluctuations and the economic
environment. If the value of Chi square is more than 0.05, then there is no association
between the above two variables.
Therefore, with the help of the above given table of content, it can be determined t5hat
there is a strong association between the Currency fluctuations and the economic
environment of India.

31
Graph No.3: Showing the different phases of the economy when a currency fluctuation
happens.

How does the fluctuations in Currency Impact the Economy?

A drop in the value of currency has a direct impact on the following aspects of the
economy:
Merchandise trade: This implies to a nation’s international trade, or its exports and
imports. In layman terms, a weaker currency will adversely affect the exports and make
imports more expensive, thus decreasing a nation’s trade deficit (or increasing surplus)
over the period of time.

Economic growth: The formula for an economy’s GDP is C + I + G + (X – M) where:

C = Consumption or consumer spending
I = Capital investment by the businesses and households G = Government spending
(X – M) = Exports minus imports, or net exports.

32
From this equation, It is clear that the higher the amount of net exports, the higher
is the nation’s GDP. Also, net exports tend to have an inverse correlation with the power
of the domestic currency.
1. Capital flows: Foreign capital most probably flow into countries that have
strong government and stable politics, dynamic economies and stable currencies. All a
nation needs is to have a relatively stable currency to attract investment/foreign capital
from foreign investors. Otherwise, the prospect of exchange losses inflicted by currency
depreciation may deteriorate the relationships with the overseas investors.

Graph No.4: On the basis of RBI exchange rate data, the movements in the
FOREX reserve.

RBI Intervention: When there is too much volatility in the rupee-dollar rates, the RBI
prevents rates going out of control to protect the domestic economy. The RBI does this
by buying dollars when the rupee appreciates too much and by selling dollars when the
rupee depreciates way too much.
Inflation: When inflation increases there will be less demand of domestic goods and
more demand of foreign goods i.e. increases demand for foreign currency), thus value
of foreign currency increases and home currency depreciates thus negatively affecting
exchange rate of home currency.
Imports and Exports: Importing foreign goods requires us to make payment in foreign
currency thus strengthening the foreign currency’s demand. Increase in demand
increases the value of foreign currency and exports do the reverse.
Interest rates: The interest rates on Government bonds in emerging countries such as
India attract foreign capital to India.

33
If the rates are high enough to cover foreign market risk, money would start pouring in
India and thus would provide a push to rupee demand thus appreciating rupee value for
exchange.
Operations: The major sources of supply of foreign exchange in the Indian foreign
exchange market are receipts on account of exports and invisibles in the current
account, drafts, travelers, cheque and inflows in the capital account such as foreign
direct investment (FDI), portfolio investment, external commercial borrowings (ECB)
and non-resident deposits. On the other hand, the demand for foreign exchange rises
from imports and invisible payments in the current account, amortization of ECB
(including short-term trade credits) and external aid, redemption of NRI deposits and
outflows on account of direct and portfolio investment.

The table below is showing the continuous depreciation of Indian rupee with US dollar
(RBI exchange rate data).
Graph No.5: Historical chart of US Dollar to Indian Rupee

34
Graph No.6: a line graph of currency fluctuations.

The above two graphs are from two different sources, and both the data are close to
each other.
Some of the reasons are mentioned below. A number of factors can cause currency
depreciation, i.e. economic, political, corruption etc., but some factors require greater
attention and should be analyzed objectively than the others
1. Dollar on a Strong Position in global Market: The main reason behind rupee fall
is the strong grip of the Dollar Index. The top notch performance of US equities and
the exclusive improvement in the labor market has made investors happier about the
outlook for the US economy.

2. Recession in the Euro Zone: The rupee is also feeling the pinch of the recession
in the Euro zone. From the past few months global economy is suffered from Euro
crisis, investors are focused on selling Euros and buying dollars. Any outward flow of
currency or a decrease in investments will put a downward pressure on the rupee
exchange rate.
3. Pressure of increasing Current Account Deficit: The country with high exports
will be happier with a depreciating currency India, on the other hand, does not enjoy
this because of crude oil and gold consist a major portion of its import basket. Euro
zone, one of India's major trading partners is under a severe economic crisis. This has
significantly impacted Indian exports because of reduced demand.

35
4. Speculations from Exporter and Importer side. The reason of fall in rupee can
be largely attributed to speculations prevailing in the markets. Due to a sharp increase
in the dollar rates, importers suddenly started gasping for dollars in order to hedge their
position, which led to a further demand for dollars. On the other hand exporters kept on
holding their dollar reserves, speculating that the rupee will fall further in future. This
interplay between the two forces further fueled the demand for dollars and a fall in
rupee.

5. Unattractive Indian Market: Foreign Institutional Investor’s (FII’s) are a good

source of dollars inflow into the Indian market. As per a recent report, the share of
India’s FII in the developing markets has decreased considerably (till 2014). Strict
political policies are also reasons of such lack of appeal.

6. Interest Rate Difference: Higher real interest rates generally attract foreign
investment but due to slowdown in growth there is increasing pressure on RBI to
decrease the policy rates. Under such conditions foreign investors tend to stay away
from investing. This further affects the capital account flows of India and puts a
depreciating pressure on the currency.

36
 Chapter 7: RECOMMENDATIONS/ FINDINGS

RECOMMENDATIONS

Some fundamental reasons why USD has appreciated and may keep appreciating for
some more time:
The strength of the American Economy that has started growing at 4.2% against the
predicted 4% in the second quarter of 2018. It is the highest growth since the third
quarter of 2014.The US has tightened policies that allowed cheaper imports in the
country. This means imported goods would attract more duties and the imports will fall
and therefore lower outflows of USD for payment of imports.
US under President Trump is seeking a fair balance of trade with partnering countries
asking them to lower taxes on American products that will mean there will be more
American products exported that will improve inflow of USD into American Economy.
America is the largest importing country for both manufactured goods as well as
services. Trump’s America first policy aims to bring back manufacturing and many
services back to America that aims to lower unemployment which is now very low and
lower outflow of US Dollars
On 18 September 2018, Indian Rupee depreciated to 72.98 against the US Dollar and
there is a chance that it may further slide and fall as low as 75 against the US Dollar.
Forex Experts and economists claim that there are plenty of reasons for the decline
other than this. Like the high demand for American Dollar, surging crude oil prices and
capital outflows that have an impact on the Indian currency.

Graph No.7: Dollar’s performance in the past 5 years.

37
 FINDINGS:

Why Rupee is falling against Dollar currently?

• At the time of India's independence, the value of one dollar was equal to one
rupee but in the June 2018, the value of Indian rupee against the US dollar has reached
its lowest level at Rs.72.51 per dollar. In this article, we explained the reasons behind
the depreciation of Indian Rupee in the current months.
• At present, the value of India's currency "rupee" is continuously falling and its
value has declined by 12% between January-September 2018. Among the BRICS
nations; after the Russian Ruble, the Indian rupee depreciated the most in this period.
Now the exchange rate between the dollar and rupee is hovering around Rs.70= 1 dollar.

• At the time of independence; India adopted the Par Value System of

International Monetary Fund (IMF). On the August 15, 1947; the exchange rate
between the Indian rupee and US dollar was 1USD = 1 INR.
• Now let us understand the reasons behind the depreciation of the Indian rupee
against the dollar currently;

1. Increase in the price of the crude oil: As we all know that India produces just
20% crude oil of her requirement and rest is imported from the other countries like Iraq,
Saudi Arabia, Iran and other gulf countries. Crude oil is the biggest contributor in the
import bill of India.
According to a January report from energy research and consultancy firm Wood
Mackenzie. The daily fuel demand of India is expected to more than double to 190,000
barrels in 2018, up from last year’s 93,000 barrels.
As the demand of crude oil is increasing the bill of oil import is also increasing.

Data published by the Petroleum Planning and Analysis Cell (PPAC) points that India’s
total crude oil import bill in the current financial year (2018-2019) is expected to jump
24% to $109 billion from $88 billion last fiscal year.
Economic survey 2018 estimates that if the price of crude oil increases 10 dollar per
barrel then the GDP of India decreases up to 0.2-0.3 percent.

38
So increase in the demand of crude oil will be followed by the increasing import bill in
the form of payment of more dollars to oil exporting countries. Hence the demand of
dollar will increase in the Indian market which will reduce the value of Indian rupee.
2. Beginning of trade war between the USA and China: The US President Donald
Trump has initiated the trade war with China and European countries and India and
these countries also retaliated in the same way. So due to this war the price of the
imported commodities will go up which will further increase the outflow of dollar from
the Indian market.
As we know that Indian import bill is always greater than its export bill. It means that
the trade war will adversely affect the Indian market and India will also experience the
outflow of US dollar from its domestic market.

3. Increasing Trade Deficit of India: A situation, in which the import bill of a

country exceeds its export bill, is called trade deficit.
Indian merchandise trade deficit of $157 billion in 2017-18 was the widest since 2012-
13. In the FY 2012-13, the country had reported a merchandise trade deficit of $190
billion. Trade deficit was around was $ 118 billion in the FY 2016.
Its simple meaning is; outflow of foreign currency is more from Indian market as
compared to inflow of foreign currency.
As per the law of demand; if the demand of a commodity increases, its price also
follows it. In the same way; when more and more foreign currency i.e. dollar goes out
of Indian market, its domestic price increases and the price of Indian rupee decreases.

4. Out flow of Foreign Currency: It is worth to mention that when the foreign
investors find other attractive markets in the other parts of the world; they pull out their
invested money by selling the equity shares. But they demands the most respected
currency or easily accepted money i.e. dollar. So in such situation the demand of dollar
increases which further increases its price.
Foreign Portfolio Investors (FPIs) have pulled out nearly Rs.48, 000 crore from Indian
capital markets in the first six months of 2018, making it the fastest outflow in a decade.
FPIs withdrew a net sum of Rs.6, 430 crore from equities besides Rs.41, 433 crore from
the debt markets during January-June period of the year, taking the total outflow to
Rs.47, 836 crore.

39
5. Atmosphere of Political Uncertainty: As per many surveys; done by the media
houses, the popularity of the current NDA government is decreasing which is creating
the atmosphere of the uncertainty among the foreign investors.

Major point of uncertainty is that whether the current NDA government will retain the
power at center or not. If the new government comes in the power and changes the FDI
and other policies then the money of investors will trap.
So the foreign investors are pulling out their money from the Indian market to invest in
those markets which can provide them secured return. This is the reason that the
demand of dollar is increasing and the price of Indian rupee of falling.
Hence on the basis of the combined impact of the above mentioned reasons the
exchange rate between the dollar and India rupee is touching its lowest point.
In the conclusion it can be hoped that if the RBI and government of India puts combined
efforts in this directions then depreciation trend in the Indian currency can be checked

Graph No.8: A Graph containing the comparative data of Indian Rupee w.r.t. other
currencies

40
 Chapter 8: KEY LEARNINGS
KEY LEARNINGS

8.1 GENERAL:

1. An insurance company, is prone to all the monetary and fiscal challenges faced
by the company.
2. How and when does the share price are subject to change and what news does
the articles entail are all important when it comes to buying or selling a share.
3. A share must be bought only when you are well aware of all the activities of
that particular company’s share.
4. Sometimes, the share price also falls down after reaching to a peak. How to
interpret and what actions must be taken at such times is what matters the most.
5. The mindset of a trader and that of a portfolio manager is different. A trader
doesn’t have any fear of risk. But a portfolio manager would always look out for
minimum risk.

8.2 SPECIFIC:

What are the problems faced by RBI by Currency fluctuations:

Challenges in Front of Indian Government:

1. Forex Reserves: RBI can sell forex reserves and buy Indian Rupees
leading to demand for rupee. But using forex reserves poses risk also, as using them up
in large quantities to prevent depreciation may result in a deterioration of confidence in
the economy's ability to meet even its short term external obligations.

2. Make Investments Attractive- Easing Capital Controls: RBI can take

steps to increase the supply of foreign currency by expanding market participation to
support Rupee. RBI can increase the FII limit on investment in government and
corporate debt

41
instruments. It can invite long term FDI debt funds in infrastructure sector. The ceiling
for External Commercial Borrowings can be enhanced to allow more ECB borrowings.

3. Increasing burden of servicing and repaying of foreign debt: A major

drawback of depreciation in the value of rupee is that it will enhance the burden of
servicing and repaying of foreign debt of Indian Government (which has dollar
denominated debt) and those companies that has raised dollar denominated debt. Most
of the foreign loans which are denominated in dollars, will create a burden of costly
short term debts with immediate effect.

4. Policy implications: For policymakers trying to assess the impact of exchange

rate movements on the real economy, these results provide various important insights.
Firstly, the short-run impact of a real depreciation on firm’s output growth is likely to
be negative since it is the import cost channel that dominates in the short run. Further,
the impact is asymmetric, with real depreciation having a stronger impact as compared
to real appreciation.
At the same time, maintaining a competitive real exchange rate is imperative for
boosting intermediate and long-term economic growth and maintaining the external
balance. Thus, using scarce foreign exchange reserves to prevent currency depreciation
in the face of sustained downward pressure on the currency due to growing fiscal deficit
and/ or massive capital outflows would be problematic, apart from being unsustainable.

On the whole, for countries relying on volatile foreign capital inflows to finance their
consumption and investment needs, a careful reserve management policy along with a
sound fiscal policy are necessary to balance the multiple objectives of stable growth
and external sector balance in the long run.

42
 Chapter 8: CONCLUSION

CONCLUSION

The fall in the value of currency affects a lot of economic growth indicators.
Depreciation of rupee reduces the inflow of foreign capital, rise in the external debt
pressure, and also grow India’s oil and fertilizer subsidy bills. The most positive impact
of depreciation of rupee is the stimulation of exports and discouraging imports and thus
improving the current account deficit. But, even after significant increase in the exports
and sales in this year, Indian companies are reporting huge foreign exchange losses due
to the depreciation of Indian rupee. This declines the overall profitability of these
companies. As far as imports are concerned, for a country such as India, imports are
necessary. Grim global economic outlook along with high inflation, widening current
account deficit and FII outflows have contributed to this fall. RBI has responded with
timely interventions by selling dollars intermittently. But in times of global uncertainty,
investors prefer USD as a safe haven. To attract investments, RBI can ease capital
controls by increasing the FII limit on investment in government and corporate debt
instruments and introduce higher ceilings in ECB’s. Government can create a stable
political and economic environment. However, a lot depends on the Global economic
outlook and the future of Eurozone which will determine the future of INR.
Currency moves can have a wide-ranging impact not just on a domestic economy but
also on the global one. Investors can use such moves to their advantage by investing
overseas or in US multinationals when the greenback is weak. Because currency moves
can be a potent risk when one has a large Forex exposure, it may be best to hedge this
risk through the many hedging instruments available.

Therefore,

The main reason behind rupee fall is the immense strength of the Dollar Index. The
record setting performance of US equities and the improvement in the labor market has
made investors more optimistic about the outlook for the US economy.

43
 Chapter 9: BIBLIOGRAPHY

BIBLIOGRAPHY

Arora V. And A. Vamvakidis (2004), How much do trading partners matter for
economic growth? IMF working paper, 04/26, Washington: International Monetary
Fund
Company Website: www.sbilife.co.in

Company Website: www.icicilombard.com

Company Website: www.hdfclife.com

CEIC DATA: https://www.ceicdata.com/en/indicator/india/foreign-exchange-reserves

Economic Times: https://economictimes.indiatimes.com/markets/forex/can-rupee-

again- head-to-75-to-the-dollar-in-2019-yes-here-is-
why/articleshow/67379259.cms?from=mdr
IBEF: https://www.ibef.org/industry/insurance-sector-india/showcase

Investopedia: https://www.investopedia.com/articles/forex/080613/effects-currency-
fluctuations-economy.asp#ixzz5OQQiifHc
Jagranjosh: https://www.jagranjosh.com/general-knowledge/why-rupee-is-falling-
against-dollar-1530858596-1
MarketResearch.com: https://www.marketresearch.com/Service-Industries-
c1598/Financial-Services-c83/Foreign-Exchange-c417/
Media Reports, Press Releases, Press Information Bureau, Union Budget 2017-18,
Insurance Regulatory and Development Authority of India (IRDA), Crisil

44
 ANNEXURE:

60 respondents answered, a survey of 10 questions. The following are the questions:

1. What do you think determines the appreciation of US Dollars?

• Trade wars
• Import-Export
• The ruling Government
• GDP AND GNP of the country
• All of the above.

2. Do you think the increase in the price of the crude oil has affected India's Rupee
to depreciate highly? *

• Yes
• No
• Maybe

3. Do you think U.S President, Donald Trump is the sole reason behind the high
rates of Dollar? *

• Yes
• No
• Maybe

45
4. Do you think India's neighboring countries play any major role in Rupee's
depreciation as compared to the universally accepted currency- Dollar? *

• Yes
• No
• Maybe

5. How according to you, does the Indian rupee face attrition from the US
economy? *

• Import- Export rate fluctuations

• Discrepancies in Political relationships
• Global recession.
• Trade Wars
• Other

6. Recent trade wars between USA and China has indirectly affected India
resulting in to a downfall of Rupee rates in the US market of Currency. *

• Strongly disagree
• Disagree
• Neutral
• Agree
• Strongly agree

7. Do you think India's Prime Minister Narendra Modi and U.S President Donald
Trump's deteriorating relationship can cause a huge leap for the exchange rates in
future? *

• Yes
• No
• Maybe

46
8. Do you think the Indian Government's inefficiency with respect to the nation's
development is the root of this imbalance in the Forex rate? *

• Yes
• No
• Maybe

9. "Indian Economy is growing ever since there has been a change in the
Government." Do you think the previous Government would have performed better
than the current one? *

• Strongly disagree.
• Disagree
• May be
• Agree
• Strongly agree

10. "The Rich get richer and the Poor get poorer."- is what the Dollar appreciation
& Rupee depreciation resulting to? *

• Strongly Disagree
• Disagree
• Neutral
• Agree
• Strongly Agree

47